Why do I need a 'strategy' for the emergency fund? Because I believe
in having backup plans! Just in case something goes wrong like you
can't get to the bank, you lose your debit/credit card, the internet
explodes, etc.
So I decided to do something like this:
- 6 months' expenses in a long-term account e.g. 3yr deposit postal account
- 1 month's salary in your current account as a backup (like one of the YNAB principles)
- household item replacement fund in a simple online savings account linked to your current (checking) account - this is where you save a bit to replace your kettle/oven/etc. in case it breaks
- credit card (e.g. 0%) that you don't use. Then if you have the emergency like you spilt water all over your tv, you can buy a new one on the credit card and pay it off with the household item replacement fund.
Of course, you may have contents insurance, but you just need to
be careful your premium wouldn't go up too much if you claimed a new
oven/tv etc. through the accidental damage coverage. I guess this is the
same as for minor car accidents, sometimes it's just cheaper to pay for
the repair, rather than claim it on the insurance as the premium could
jump horrendously.
There are a few sneaks you can do to make it easier too, such as use the kind of credit card that gives cashback/airmiles/tesco points/etc. as long as you pay it off every month. That way, you're essentially getting free money, or cash equivalents that you can use to put towards emergency funds or whatever else you want!
You may be thinking: "Hmmm, that's a lot of cash lying around that could be invested". Well, yes it is a fair bit, but that is because only one of us is working right now, and we have a young child, so we don't want to take any chances. Plus, he's trying to walk right now, so I foresee potential broken TVs and the like, hence the desire for household item replacement fund! Everybody's situation is different. If I were single and childless, I would just have 3 months'+ of emergency fund, the backup 1 months' salary, and the rest I'd just add to value/dividend growth investments.
Clearly, if you can't get inflation-beating returns, then it also may not be worth it, but in our case we managed to get an account that pays RPI (usually the higher of the two inflation measures) plus 0.5%, so we are guaranteed to be ahead of inflation. If you cannot get something like this, then you may be better off keeping an unused credit card and putting the rest into dividend growth stocks.
The other advantage of having a replacement item fund for us in particular, is that most stuff in our house is at least ten years' old. We have been really lucky I suppose, but we do try to look after our stuff. The PC I'm writing on is 11 yrs old! I also have another one which is something like 13+ yrs old. I have just upgraded them as and when I could, e.g. by maxing out the RAM, like Lanny did, or getting a better HD, additional storage, etc.
Reminder: I am not a financial advisor, you should make your own decisions consulting a registered professional if needs be.
Photo credit: digitakart/freedigitalphotos.net
0 comments:
Post a Comment